FP summer school: 16 tax tips for moonlighters and freelancers

Summer school isn’t a punishment. Think of it as a second chance or bonus education. But instead of improving your GPA, we will help you improve your credit score. That might mean repairing your finances with better saving, earning more money, paying less taxes or getting smart with your investments.

This week: Tax savvy moonlighting 101

Course description: Personal finance articles tout many different strategies on how to build wealth. Invest. Use your RRSP. Use your TFSA. Pay down your debt. Get the lowest mortgage rate. But you’ve caught on to another key tactic — you’re going to try to boost the bottom line by moonlighting.

School’s in session for improving your finances. FP kicks off our summer series with a tutorial on how to get results when you ask your boss for more money

Maybe you’re doing consulting on the weekends or cutting lawns or self-publishing books or teaching spinning classes. Maybe you’re selling your pet portraits at the local café or on Etsy.com. Maybe you’re babysitting so the neighbours can finally go see movies that don’t star Disney princesses.

You’re not alone. Over the past decade, the number of self-employed workers has increased by 17%. According to Statistics Canada, about 2.67 million or 15% of Canadians are self-employed which includes business owners, freelancers and contract workers. We’ve come up with every entrepreneurial word we can think of: mompreneur, technopreneur, seniorpreneur and also minipreneur which seems to be a catchall for anyone doing a side business whether he’s doing advertising-sponsored blogging or acting as a virtual assistant.

Lesson: Now that you’re freelancing or taking a dilettante’s approach to arts or becoming a moneymaking hobbyist, make the most of your money by organizing your taxes and taking full advantage of credits and deductions. Let’s look at planning ahead with 16 tips for your ambitious self.

1. Declare your income. You should technically declare your earnings, however small they are. “If you cut grass, that would be considered self-employed income and you’d claim it on your tax return,” says Caroline Battista, senior tax analyst at H&R Block. “The best thing to do is to track all of your income and all of your expenses. In the beginning, if you’re starting a business, you might show some losses. Those losses could go against other income that you have.”

2. Earmark that extra cash. Give that money a good use. Make it your entertainment spending. Or use it to pay down debt. If you babysit one evening a week and make $150 a month, you can pay off your $1,000 credit card balance in about seven months (versus more than nine years making the minimum payments). Make it a part of your greater financial plan, especially if you are looking to turn your hobby into a more lucrative business.

3. Set money aside as you go. Your neighbour may have handed you $150 in cash but that could actually be $105 after you pay the government what they’re due (assuming you’re in the 30% tax bracket). Know what your tax rates are — they’re posted on the Canada Revenue Agency’s website. “I’d tell people to hold back 30% to 40% for tax and CPP because you don’t want to be surprised at the end of the year which can happen so often,” Ms. Battista says.

4. Keep records. Start hoarding all of your invoices, receipts, etc. in a box/file organizer or scan your receipts onto your computer. Be prepared to hold on to your paperwork for seven years in case the taxman asks for it. Also, start separating your expenses into different categories. The CRA does not like it when you lump all expenses into the “miscellaneous” category. Have a separate bank account and credit card for your business.

5. Deduct your home office. Use a reasonable area of your workspace divided by the total area of your home to calculate the part you can deduct. You can also deduct the same percentage of your maintenance costs (heat, home insurance, electricity and cleaning materials), property taxes and mortgage interest, Ms. Battista says.

6. Deduct the interest on money borrowed for business purposes or to acquire property for business purposes. “If you buy all of your supplies and material to get started and you make that purchase on a credit card, deduct that interest,” Mike Delves, an accountant and business advisor at MNP LLP in Nanaimo, B.C.

7. Accounting, legal or administration fees are deductible. Did you pay someone to help with record keeping for your business? Deduct those and any management and administration fees such as bank charges or your business account’s monthly bank fee.

8. Be reasonable with food, beverages and entertainment expenses. Someone who works on the weekends as a club promoter might have higher entertainment expenses than a gardener. You can claim 50% of your entertainment bills. “Every time I get a receipt, I turn it over and write on the back what it is for,” Ms. Battista says. “Credit card statements are not enough. It’s important to track it all clearly. There are lots of apps now that track your expenses.”

Related

9. You can deduct expenses for advertising and promotion — printed flyers, Facebook ads, newspaper ads, etc. “If you throw a garden party at home for a direct sales company, that [cost] is not meals and entertainment — that is promotion and you can write off 100%,” says Tim Chang, a tax and financial planner at Leach Bradbury Chartered Professional Accountants and Financial Planners in Ottawa.

10. If you use your motor vehicle for your side job, you can claim those costs. This includes licence and registration fees, fuel costs, insurance, maintenance and repairs and leasing costs.

What you need to do is record your mileage on Jan. 1 and then keep a travel log for freelance/hobby/business-related trips: record the date, destination, purpose and number of kilometres you drove. “Some people say that they drive 30% [for their business]. If you are called to send in your travel log, you need to be able to prove that percentage,” Ms. Battista says. “If you can’t back it up, you lose that claim against the income.”

11. Don’t forget what you received from generous strangers. The CRA says that crowdfunding is business income and subject to tax. Declare it.

12. It’s best to have a separate business phone line. But if you use your home phone or cellphone for business calls, keep a log. “If you keep a log of your phone calls and you make 100 phone calls in a month and 20 of those calls are for business, then you can deduct 20% of your phone bills,” Mr. Delves says. “If it’s reasonable, then it’s deductible,” Mr. Delves says. The same rule applies to the Internet. “But if you’re trying to deduct 100% of your Internet, you’ll need more documentation to back it up.”

13. Claim the stuff you use in your office (pens, stationery, paper clips and stamps) and supplies. Supplies are consumable items that your business uses to provide goods or services (cleaning supplies used by a plumber, molding clay used by artists, ballroom shoes for dance teachers, Tasers used by babysitters, just kidding!)

14. Claim your capital expenses and depreciation in value. What are capital expenses? Valuable longer-term assets like calculators, filing cabinets, chairs, desks, camera equipment, etc. “You can deduct the depreciation of those items based on their use for business,” Mr. Delves says. The depreciation rates vary per item: computers depreciate by 55% per year meanwhile machinery depreciates by 20%.

“If you’ve got a lawn mower and the market value is $500 and you’ve just started using it for business purposes — half of the time you’ve used it for business and half of the time you use it to mow your own lawn — you’ve got a $500 item times 20% (your capital cost allowance rate), times 50% for the business use portion. That’s what you can deduct on an annual basis.”

15. Authors attending book conventions, photographers taking a ferry to a wedding, etc. should write off travel costs such as public transportation fares, hotel accommodations and meals. (When you travel on an airplane, train or bus when the ticket price doesn’t include such amounts, there’s a 50% limit on the cost of food and beverages served and entertainment enjoyed.)

16. When your hobby becomes a hit and your sales exceed more than $30,000 a year, you’ll need to register for GST/HST. If you’re registering for GST/HST, you have employees or you’re importing or exporting goods, you need to ask the CRA for a business number.

Homework (one thing to do this week): This is a great time for a mid-year check. If you’ve just been throwing all of your receipts into a shoe box or drawer, now is a good time to get organized. While your memory is still fresh, sort through some receipts and divide them into envelopes or folders or scan them. If you notice that things are missing, see if you can ask for new print-outs or hunt down receipts.

Reading list:167 Tax Tips for Canadian Small Business by Stephen Thomson and Make Sure It’s Deductible by Evelyn Jacks.